Lease or buy? Finance executives grapple with this decision constantly, whether it’s for office space, furniture, vehicles, maintenance equipment, or scores of other products. Now, thanks to mostly flat sales in many types of computer hardware, the IT market is full of special finance deals. CFOs should negotiate not just on price, but also on terms.
“Every one [of the major hardware vendors] is working with its customers to find the most affordable way to fund customers’ investments,” says John Madden, practice director at Summit Strategies Inc., a technology research firm in Boston. “Vendors are eager to get new business and to keep the business they have.”
Hardware manufacturers are offering an array of promotions usually associated with discount furniture stores: deferred payments, zero-percent-interest financing, consolidated monthly payments, and more. Meanwhile, Web-enabled leasing streamlines the paperwork by enabling customers to conduct transactions and manage accounts online.
The IT hardware market is one of the largest segments of the U.S. leasing industry, according to the Equipment Leasing Association (ELA), in Arlington, Virginia. The market in the United States is projected to grow from $23.8 billion in 2002 to $28 billion by 2005, a 6.5 percent average annual growth rate. From 1998 to 2002, it grew at just 1.5 percent annually.
The ELA says the key factors driving the rise in leasing include new enthusiasm on the part of vendors, which are more inclined to offer leasing as an option to win business; an equally keen interest in leasing arrangements on the part of captive finance companies such as IBM Global Financing, HP Financial Services (HPFS), and others; and the usefulness of the Internet as a more-efficient means of processing applications, providing status reports, and handling billing.
Most of the major IT hardware vendors are offering new leasing and financing options to drum up business. IBM last November launched a new program called IBM WorkPlace On-Demand services, which it says can help companies cut the cost of managing PCs, printers, copiers, fax machines, and mobile devices by up to 30 percent. Under the program, IBM provides these products and the associated financing as a “service,” charging customers through a single bill a fixed monthly rate per user as part of an IBM Global Financing three-year package.
Ernie Fernandez, vice president of customer financing in the Americas for IBM Global Financing, says programs such as WorkPlace On-Demand and other pay-as-you-go offerings were developed in response to demand for more cost-effective acquisition schemes. One of these options is the Total Solution Financing program, which combines all hardware, software, and services, including non-IBM gear, into a single contract, making it easier for companies to track financed and leased assets, he says. IBM says customers can save substantially by paying only for the technology services they use, a claim made by several vendors.
Hewlett-Packard, for example, is also offering new lease options—such as a consolidated payment plan that lets customers finance hardware, software, and services from HP and other vendors, and a pay-per-use program for hardware—through its HPFS subsidiary. HP’s pay-per-use program includes a suite of services that gives companies access to on-site servers, storage systems, and other IT hardware on a metered basis. HP uses a sophisticated metering technology installed on the customer’s site to measure product usage, which represents an early example of the “utility computing” concept.